The government has opened the doors for foreigners in multi-brand retail, even though there was stiff opposition to it from several quarters. Still, the whole debate around its efficacy simply refuses to die down. The government is hopeful that this will bring in huge investments, create jobs, improve the country's supply chains and fetch better prices for farmers. Detractors, on their part, say it will drive Indian shopkeepers to bankruptcy, bring in corrupt practices (the recent Walmart revelations have provided them with fodder to support their point), and squeeze the last paisa out of farmers and small suppliers who choose to sell to these chains. While both sides slug it out, one thing is for sure: Indian retailers are in desperate need of some expert help, which foreigners could provide. Away from public scrutiny, a big experiment in the retail sector has flopped miserably: rural retail chains.
DCM Shriram Consolidated used to run over 300 Hariyali Kisaan Bazaar stores in eight states. At its peak, this business used to fetch the company a turnover of Rs 800 crore in a year. Each store would cater to 15,000 farmers and their families. The company had ambitious growth plans and had even contemplated stocking Chinese ready-made garments at its stores. Most of those stores have now been shut. Only 37 are in operation at the moment; those too sell only petrol and diesel because they house fuel stations of state-owned oil marketing companies. In early 2010, Triveni Engineering mothballed its rural retail arm, Khushali Bazaar, after it had suffered a loss of Rs 19 crore in five years of operations. "Retail was a low- margin business with lesser scope of high returns. It was not something where the best management, time and capital could have been deployed," Dhruv Sawhney, chairman and managing director, Triveni Engineering, told Business Standard in mid-2011. Godrej Agrovet sold 70 per cent of its Aadhaar rural retail business to retail king Kishore Biyani's Future Group.
When these companies started out, the business case was impeccable. Rural incomes were on the rise because the prices of farm commodities had risen handsomely. The Mahatma Gandhi National Rural Employment Guarantee Scheme had led to an all-round increase in rural wages. So there was higher purchasing power in the hands of rural folk. Sale of non-essential products was on a northward curve. At the same time, unlike in cities, real estate prices were low in villages; so setting up large stores wasn't too expensive. All of a sudden, villages had become interesting markets. Low-cost business models were the rage. Ratan Tata had put the Nano on the drawing board. Rural retail was a logical extension for companies that had strong links in the rural markets. It was the smart thing to do.
Much of that still holds true. Farm commodity prices continue to remain high, though some crops like onion and potatoes may have been volatile. The market, as a result, is still buoyant. In several product categories, the contribution of rural markets is on the rise. So much so that rural markets now account for almost 40 per cent of the sale of fast-moving consumer goods in the country. For companies like Hindustan Unilever and Dabur, which have focused their energies on villages and small towns, the contribution is as high as 50 per cent. Hero MotoCorp reckons that almost half of its sales now come from the rural market. So, what has turned rural retail into an unviable business proposition?
There are several reasons. One, the purchases made by farmers remained small. The volumes, in other words, could never make up for the costs, however bare bones the operations might be. Two, the logistics costs were too high. The stores were spread thinly over a large geography, resulting in high transport costs. Managing inventory had become a nightmare. Three, since power supply is erratic in villages, most of these stores need to be run on generator sets - the cost of running these proved crippling. Four, these stores could never displace traditional shops. Rural markets work on credit and relationships. The new-age stores never gave credit and were always seen as outsiders.
Could the rural retail experiment have been salvaged by partnering with multinational retailers? One thing is for sure: the market is certainly there. What is required is more efficient management of costs. Maybe some advice from global retailers could come in handy here.
It is interesting to see what Mr Biyani is doing with Aadhaar. He is transforming it from a retailer to a wholesaler. At the same time, he has decided to appoint franchisees to run the Aadhaar retail outlets. The retailers will, of course, source their stock from Mr Biyani's wholesale store - the hub-and-spoke model. In Gujarat it runs a wholesale store, which feeds 20 or 25 stores. It has now opened its second wholesale store, in Punjab, which caters to six or seven retailers; but the number could grow in the days to come. Most of the franchisees are local shopkeepers who are happy to let Mr Biyani's team manage their inventory. They are not outsiders, and they have relationships in place with local customers. Most important, they are ready to give credit.
Mr Biyani's men say the experiment is working well. The final result will be known only when the business is scaled up.